Dynamic Pricing in Shipping. How can Shippers, Ocean Carriers, and Freight Forwarders Leverage Dynamic Container Pricing?

Dynamic Pricing in Shipping. How can Shippers, Ocean Carriers, and Freight Forwarders Leverage Dynamic Container Pricing?

Dorota Owczarek - August 1, 2022

The shipping industry is under pressure. With the super high shipping rates, shippers are demanding more transparency and cost-effective solutions from their logistics service providers. With larger vessels and ever-tightening schedules, ocean carriers are looking for ways to optimize pricing and keep their vessels full. At the same time, freight forwarders are looking for ways to get more out of their customers by offering dynamic pricing options. How can these groups work together to create a more efficient shipping industry? In this article, we will explore how dynamic container pricing works and how it can benefit both ocean carriers and freight forwarders.

How to Optimize Freight Pricing Under Market Volatility?

As we’ve noticed during the last years, the state of ocean freight is massively impacting global supply chains. The record-high container shipping prices have never been that high, with container fleet owners getting the highest revenue. We witness an influx of new container ships being manufactured and ordered. At the same time, we see a lack of necessary containers to ship the world’s goods, again pushing up the rates. The ships can often not be unloaded because the container yards are full (growing dwell time for container boxes). Covid pandemic, port congestion, and other unexpected events make the market even more volatile.

China-Global & Shanghai Export Container Freight Index showing almost exponential growth of containerized freight rates starting in 2020

China-Global & Shanghai Export Container Freight Index showing almost exponential growth of containerized freight rates starting in 2020. Source: MacroMicro and Shanghai Shipping Exchange, SSE

While shipping lines are doing good business now, in a context of high market volatility caused by various geopolitical factors, shippers and freight forwarders are trying to take back control of their destiny by optimizing their pricing strategy. To stay afloat during these difficult times, it is crucial to have a pricing strategy that can adapt to the ever-changing landscape.

How Do Carriers Price Ocean Freight?

The first step is understanding how ocean carriers and freight forwarders price ocean freight. In the liner shipping industry, if a shipper wants to transport its cargo by container ships, it first needs to contact an ocean carrier or freight forwarder to book container slots based on the estimated transportation demand. However, one problem in the booking process is that the actual demand is uncertain, resulting in a mismatch between the required demand and the booked quantity.

There are two main types of container pricing: spot market and contract freight.

Spot Pricing

Spot market rates are the current, or “spot,” prices that carriers charge for shipping containers on the open market. Freight is fraught with multiple types of uncertainties. That’s especially true for the notoriously volatile spot market, where most shipments are handled – and priced – on a one-time, transactional basis. These rates are based on several factors, including vessel capacity, port congestion, fuel prices, and demand. Because spot market rates can change rapidly, they are often used as a benchmark for contract freight rates.

Contract Pricing

Contract freight rates are negotiated between carriers and shippers and are based on several factors, including historical spot market rates, vessel capacity, port congestion, fuel prices, and demand. Although having a contract for a dedicated slot on a vessel, whenever a shipper does not deliver the container for the booked slot, they still need to pay a penalty fee (no shows). With high market volatility and the growing prices, negotiating the contract prices has become a challenging task for the shippers.

Container Slot Allocation

Ocean carriers use a system called slot allocation to determine the price of shipping a container. Slot allocation is the process of allocating a certain number of slots on a vessel for each cargo type. The number of slots available for each cargo type is determined by the weight and type of vessel, as well as the port schedule. This system ensures that each cargo type has a guaranteed space on the ship, but it also means that prices can vary depending on demand.

Dynamic Pricing and Predictive Freight Rates

With the current state of the market, shippers and freight forwarders can no longer rely on linear pricing models to determine the cost of shipping their cargo. These models are based on historical data and do not take into account the ever-changing landscape of the shipping industry. Instead, they need a model that can adapt to these changes and provide accurate rates in real-time. This is where dynamic container pricing comes in.

Dynamic container pricing based on artificial intelligence is a new pricing strategy that allows ocean carriers and freight forwarders to optimize their prices in real-time, based on historical data, current market demand and conditions, and the power of predictive analytics. This model considers all factors that affect ocean freight rates, including vessel capacity, port congestion, loading/unloading times, fuel prices, regional trends, specific lane cost information, consumption patterns, and future demand.

A successful dynamic pricing strategy needs to have 360-degree access to real-time and historical data to look for trends and predict future rates.

dynamic pricing model how it works

How a dynamic pricing model works?

Dynamic container pricing is the wave of the future in shipping, and those who adopt this model will be able to stay ahead of the competition. Those who don’t will be left behind.

Optimizing Shipping Costs and Reducing Margin Leakage

The current system of allocating slots and determining prices is complex and ever-changing, making it difficult for shippers and freight forwarders to keep up. This complexity often results in overbooking, cancellations, and empty containers — all of which are costly.

With an interconnected AI-based system for planning and dynamic pricing, shippers and freight forwarders can optimize their shipping costs and reduce margin leakage. This system would allow for real-time monitoring of the market, as well as provide predictions for future rates. It would also provide a recommended price for each container, based on the specific lane and cargo type.

This system would not only save money but would also improve customer satisfaction by providing accurate ETAs and delivery times. In an industry where time is money, this system could be a game-changer.

Machine Learning Models for Building Dynamic Pricing Strategy

Building a dynamic container pricing model is no easy feat. It requires access to large amounts of data, as well as the ability to clean and process this data. Once the information is processed, it must be fed into an artificial intelligence algorithm that can learn from it and make predictions.

Many different machine learning pricing algorithms could be used for this task, but some of the most popular ones include decision tree-based methods, Bayesian models, and reinforcement learning. Each of these algorithms has its own strengths and weaknesses, so it’s essential to choose the one that is best suited for your data and your use case.

Reinforcement learning model for building a dynamic pricing strategy

Reinforcement learning model for building a dynamic pricing strategy. The model is adjusting prices based on current market demands to increase revenue.

Once you’ve built your dynamic freight pricing model, it’s crucial to test it and see how it performs. This can be done by using a hold-out set of data that the model has not seen before. If the model can make accurate predictions on this data, then you can be confident that it will perform well on new data in the future. You can read more about dynamic pricing algorithms in our previous article.

Integration With Other Logistics Systems Is the Key to Success

To be successful, a dynamic container pricing model needs to be integrated with other systems. This includes the booking system, the maritime transport management system, and the billing system.

The integration of these systems will allow for a seamless experience for the shipper, the freight forwarder, and ocean carriers. It will also allow for accurate predictions, freight rate recommendations, and real-time monitoring of the market demand and other external factors.

Benefits of Dynamic Pricing Strategies for Containerized Freight Rates

A successful dynamic pricing strategy can have several benefits. Advantages and the shape of the final solution depend on the application of the dynamic pricing model - will it be used by the shippers, container brokers, or ocean carriers?

Advantages of Introducing Dynamic Pricing Strategies for Shippers

Shippers have been the most impacted side of the market. Shippers have been seeing real stresses on their supply chains due to higher container shipping rates. The risks of supply chain disruptions that result in higher prices and delays are more spaced-out in heavily traded industries and when the main parts of the supply chains are concentrated in a single region. Super high rates for shippers and problems with forecasting future trends is a situation when they cannot do their business normally.

Dynamically priced contracts could help to avoid these problems. Dynamic pricing models applied by the shippers can improve their response capabilities when the supply and demand changes arrive due to shocks in the market conditions. They can help them in contract negotiations resulting in more reasonable and predictable rates. If the contract is based on a dynamic pricing mechanism, it will give shippers some price protection against sudden rate peaks. This type of contract would allow for a more predictable cost structure and give shippers greater flexibility in managing the transportation budgets.

Dynamic pricing models can also help shippers better forecast future trends. With access to data on past market conditions, shippers can develop models that will help them predict future trends. This will allow them to make changes to their supply chains in advance, which will save them money. E.g., if there is a decrease in rates and the forecasting model predicts higher rates in the future (for instance, the seasonal fall in spot rates following the Chinese New Year), shippers can choose to ship more products using on-spot freight to take advantage of the lower rates.

Benefits of Dynamic Container Pricing for Freight Forwarders

The freight forwarder, sometimes called a freight agent as they act as the shipper’s agent in the transaction with the sea-shipping company, makes the arrangements and negotiates the best price for the shipment with the sea-shipping company. Container brokers currently work with ocean carriers to find the best rate for their customers shipments. However, this process is manual and time-consuming and does not guarantee a satisfying revenue.

A dynamic pricing system could automate this process and make it much easier and faster for brokers to find the best rates. First of all, it saves an enormous amount of time as the process is automated, and it reduces the costs of highly skilled broker agents. Secondly, it gives sales teams more time to focus on their customers and develop relationships with them. And last but not least, it allows them to get the best rates for their customers’ shipments, which results in a revenue boost.

Dynamic pricing models for on-spot freight can help in building automated bidding systems. These systems would automatically submit bids to ocean carriers based on the current market conditions. This would allow freight forwarders to take advantage of market volatility and get the best profit margin (securing low prices from ocean carriers and higher, yet reasonable for the shipper).

How Can Dynamic Container Pricing Strategy Benefit Ocean Carriers?

For many years shipping lines were not so profitable due to low rates. The situation changed massively during the last two years, with container shipping for the ocean carriers becoming a very profitable business. Currently, they are making unprecedented profits. However, this is a cyclical business, and it is essential to consider that the current situation will not last forever (although getting back to prepandemic rates is still not forecasted for the near future).

When rates were low, carriers struggled to cover their costs. When rates are high, as they are now, carriers have an opportunity to make profits and invest in their businesses (we can see increased investments in the number of orders for new vessels).

Ocean carriers can use dynamic container pricing to utilize their vessels better and fill empty slots. By considering current market conditions, they can optimize their prices to fill up their ships while maximizing revenue. Dynamic pricing models can help produce spot rates that would maximize revenue for the carrier while still being attractive to shippers. A fully integrated system with dynamic pricing at the core can allow the design of automated smart contracts.

Related case study: Developing a logistics platform offering real-time visibility and integrations with different carriers

One of our clients from the shipping industry was seeking to improve the global supply chain optimization product.

Our challenge? Providing visibility and data transmission for maximum efficiency and control. We supported solution development for end-to-end execution of shipping activities in Supply Chain Management at the PO/SKU level, including PO creation, stock management, suppliers and distributors management, consolidation and load planning for containers, ocean carrier allocation, documentation, and final delivery.
Read more about this case study.

Key Features of Successful Dynamic Pricing Strategies in Shipping

Dynamic pricing is a powerful tool that can be used to optimize shipping strategies. To be successful, there are a few key features that your dynamic pricing strategy should have:

  • 360-degree access to real-time data: This data includes ship capacity, port congestion, loading/unloading times, fuel prices, regional trends, specific lane cost information, demand, and changing market conditions. It allows you to adjust your prices accordingly in order to stay competitive.
  • The ability to learn from historical data: By looking at historical data, you can identify trends and seasonality patterns and predict future rates.
  • Seamless integration with other systems: This includes the booking system, the transport management system, and the billing system.
  • Focus on process automation: With dynamic pricing model implementation, the company should focus on eliminating manual processes as much as possible to save time and increase efficiency (automated quotes, bidding strategies, smart contracts).
  • Enterprise-class data security: Like any other system that handles data, a dynamic pricing system must have robust security features to protect your data.
  • Fast, stable, and scalable IT infrastructure: A dynamic pricing system must be able to handle a large amount of data quickly and efficiently. It should also be architected in a scalable way to support data influx and fast big data processing.

What to Expect in the Future of Container Shipping and Pricing Strategies?

Dynamic pricing is changing the whole logistics industry with its various applications for airline ticket pricing, container shipping, and land transportation. Within the maritime sector, dynamic pricing strategies are beneficial for all, the shippers, the container liners, and brokers, no matter whether in times of higher supply or lower supply. Each application is distinct, with different objectives in detail and the main common goal of revenue increase.

Dynamic pricing models for containerized freight are a complex and ever-changing field. Still, those who can master flexible prices will be rewarded with revenue boost and happier customers. So if you’re looking to stay ahead of the competition, start building your dynamic pricing model today.

Contact us today if you’re interested in learning more about dynamic pricing models or how to optimize your shipping costs with AI solutions. We would be happy to discuss this topic with you in further detail.

About the author

Dorota Owczarek

Dorota Owczarek

AI Product Lead & Design Thinking Facilitator

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With over ten years of professional experience in designing and developing software, Dorota is quick to recognize the best ways to serve users and stakeholders by shaping strategies and ensuring their execution by working closely with engineering and design teams.
She acts as a Product Leader, covering the ongoing AI agile development processes and operationalizing AI throughout the business.

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This article is a part of

AI in Logistics
13 articles

AI in Logistics

Artificial Intelligence is becoming an essential element of Logistics and Supply Chain Management, where it offers many benefits to companies willing to adopt emerging technologies. AI can change how companies operate by providing applications that streamline planning, procurement, manufacturing, warehousing, distribution, transportation, and sales.

Follow our article series to find out the applications of AI in logistics and how this tech benefits the whole supply chain operations.

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